Nedbank: "Turn interest rate pain to gain"

Rising interest rates are taking their toll as heavily indebted consumers struggle to pay off their debts.

Reserve Bank Governor Tito Mboweni makes no secret of the fact that he wants us to spend less, because South Africa's spending frenzy is pushing up inflation beyond the Bank's target rate (3%-6%).

Mboweni is sending his message across by making it more expensive for us to be in debt - because when South Africans go shopping, it's very often with borrowed money.

"Given the steady pattern of interest rate increases, consumers need to be prepared for possibly more interest rate hikes in the future," says Bryan McLachlan, Head of Transactional & Investment Products at Nedbank. But there's a lot South Africans can do to shield themselves against the impact of high interest rates.

"Instead of facing 2008 as you would face an oncoming train, you can make a plan. This would obviously require a lot of discipline and lifestyle adjustments, such as spending less, saving whatever you can and paying off as much debt as quickly as possible."

While a lot has been said about paying off debt and spending less, according to McLachlan, "the importance of saving in a rising interest rate environment has not been emphasised enough.

A budget allows you to understand where the money goes and may help you free up cash for important savings goals, such as buying a car and retirement.

Once you know where your money goes, you need to evaluate your expenses. Once you've done that, look for ways to cut down on unnecessary expenses and allocate as much money as possible to paying off debt with the ultimate goal to save as much as you possibly can. Saving on your electricity bill is a good place to start.

If you find you have some surplus income, like an end-of-year bonus, don't blow it all: use at least some of it to pay off debt.

Another saving tip is to put your surplus money into your bond account so you can pay it off quicker. This reduces the amount of interest you owe and can save you hundreds of thousands of Rands over time.

"Discipline has its own rewards," continues McLachlan. "Paying your accounts on time means you don't have to pay interest on outstanding amounts. Time is money, and you can make it your money instead of someone else's. Earn interest instead of paying it.

"It's even easier if you let technology assist you with self-discipline. Just get your bank to set up stop orders for you to put savings aside every month. Then it's safely beyond your reach and growing until you really need it.

"Saving as little as R100 or R200 a month will make a difference over time," he adds. "It gives you a cushion or safety net to use when you have unexpected expenses, so that you don't have to resort to expensive credit."

And of course it gives you more options in life. These options might be to give your child a good education, for example, or to get a new car. Big items like these are best planned for over the medium term.

What you have on your side when you save is the power of compound interest. When the interest you earn on your savings is reinvested, you earn even more interest - and this snowballs so that you build up your savings faster and faster over time. "It pays to be a little patient," says McLachlan.

But if you have already got into debt that you can't pay back in time, help is at hand. The National Credit Act, which came into effect earlier this year, provides for counselling and debt restructuring services for consumers. It's there to protect borrowers and regulate lenders.

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